Billing systems, particularly in
Telecommunications, are one of the largest expenses as quoted by prominent
executives of these organizations. At the same time these billing systems are
also the cause of their biggest problems (which are in need of the most repair
and effort). In fact, globally there will hardly be a teleco that doesn't see
repair and/or replacement of their billing systems as their main IT concern.

THE QUESTION OF COST BENEFIT

"How to compute the ROI on an
investment made on a billing system" remains a critical and unattended
question inspite of so much concern, aggravation and a handsome amount of money
being spent on these billing systems. Put another way, "What is the optimum
amount of money that should be invested on billing systems?" and "What
are the maximum and minimum limits of such spendings?" Who can disagree
with the fact that billing systems form a vital part of the overall framework of
a teleco's setup? Does it means that we spend an indeterminate amount of money
for this purpose keeping in view the significance of the billing systems.

THE TIME HAS CHANGED

It looks weird but it is a fact that an
industry that has been in existence for over 100 years has yet to find out how
to rationalize such a basic and indispensable element? Simple. In the "good
old days" of telecommunication we didn't have to worry about the cost. The
revenue stream and profit margins of telecos was so high and the cost of the
billing systems was so incredibly low compared to that profit that no one was
bothered much. It was an easy task for the billing system managers to get
financial support for improvements. The money was the only solution in case the
billing system needed improvement. The times have changed. The prices of systems
and development costs continues to raise while ARPU and returns continue to
decline.

DO WE NECESSARILY NEED A BILLING
SYSTEM?

A few years back, this might have been
a ridiculous question. All telecos required billing systems to collect revenue.

Today, however, it is all in all
likely, and maybe even enviable, for a teleco to function on an entirely
"cash in advance" or 'prepaid' mode of business. The outburst of IN
(Intelligent Network) technologies and the swift incorporation of prepaid
wireless and long distance services identifies that a teleco needs to settle on
whether it requires a postpaid billing systems when the trend in the telecom
industry is rising towards prepaid.

There can be many situations in which a
teleco may sacrifice its whole postpaid business in order to cut down expenses
of billing system as well as those related to revenue assurance, invoicing,
collections and all of those costly extra activities. Another approach to this
problem is instead of becoming 'cash and carry' operations, the telecos can
become wholesalers who sell their network capacity to others. Hence the teleco
is concerned only about interconnect, and their customers (the VASPs value-added
service providers) take care of the customer billing operations.

The obvious conclusion is that rapidly
finding out how to calculate the ROI on a billing system could be crucial to the
success of the company.

WAYS TO DETERMINE THE AMOUNT OF
INVESTMENT ON A SYSTEM

Telecos use various techniques to find
out how much they should spend. These methods fall into two classes:

1.
Lowest Price Technique

2.
Benchmarking Technique

THE LOWEST PRICE TECHNIQUE

In Lowest Price technique, the
commercial or procurement person consults with the management and formulates a
list of the features that are the absolute minimum of what is essential to run
the network. With this list, the manager endeavors to get the best bargain in
the open market for delivery of those features. If the list of minimum
requirements contains the right items, the commercial or procurement department
is smart enough to get a good bargain and the vendors are able to deliver what
they quote, then only this technique will be suitable. The fact is that, those
are some pretty big postulations. There are several logical defects in this
technique, even if it appears to be practical.

1. If
you want some extra features and functionalities in the billing system to
perform, this technique is unable to take care of them. If we include them the
price of package will be driven too high. So how do you come to a decision what
the bare minimum of functionality is?

2. As
the history shows that low cost solutions result in the overheads and delays
resulting cost of project much higher than initially anticipated.

3. The
absence of ROI on the billing system in this technique, shows only how much we
are buying it for not that whether we should be spending this amount in the
first place or not?

THE BENCHMARKING TECHNIQUE

The benchmarking technique is taken as
a relatively dependable and practical technique by most of the billing managers
globally despite the fact that it is more costly and requires more research and
involvement of management. With this methodology,, teleco managers try to search
other telecos of the same magnitude, type of business, and intricacy, who are
willing to disclose how much they spent on their billing system.

A comparative study of the pros and
cons of this technique reveals the following findings:

This technique provides some
distinctive benefits.

• Impartiality and a more global
perspective on the issues being faced

• A figure of what the total cost of
a successful implementation should be (in contradiction to the optimistic and
often unrealistic approximations of a vendor)

Unluckily, it also has its defects.

• Probability of finding out a teleco
of the same magnitude and similar enough to benchmark against is quite low.

• What about the possibility of
spending the same amount but getting more functions? What about spending half as
much and still getting all the features needed? The validity of decision is not
possible in this technique because it only tells that the Teleco made the
investment, not the result was success or failure.

This whole discussion would remain
incomplete without looking into the dimension of in-house development of billing
system. The telecos usually don't bother to go into complexities of in-house
billing systems development. The reasons may be lack of specific telecom
knowledge of analysts and developers and secondly employing a full time
development team for a project which in most of the cases is a one time task,
seems undesirable. An ideal billing engine should be developed once with
capabilities to cater maximum future enhancements in business lines and day to
day changes in tariffs etc.

Another perspective on this issue is
that the telecos have core competencies of their business more than any other
third party vendor and in-house development teams can handle the contingencies
more professionally. Depending on the circumstances and scope of business, the
choice lies on management to decide whether they can afford the long term HR
related costs or vendor charges on maintenance or each upgrade in the billing
system. We require a methodology to find out the basic, truly rationalized case
for a b

NPV AND ROI OF BILLING SYSTEM
INVESTMENT

Fundamental accounting methods can
provide an initial hint as to how ROI on billing system can be computed. In
theory, the value of an investment is determined by analyzing the net present
value (NPV) of the funds being allocated against the long term return that the
company will receive from that investment. The decision of what to invest in
depends on which investment will yield the best ROI.

FACTORS EFFECTING THE ROI

This is not so easy as it looks like.
There is a whole lot of factors upon which this ROI depends. For instance if we
look at different types of billings which involves prepaid versus /postpaid,
simple versus packaged, volumetric versus event based, interconnect versus
consumer, voice versus data and wholesale versus individual billing, we can see
a cosmos of different factors which effect the value of resulting ROI on the
billing system. In addition to these, several services which have emerged
recently such as VoIP, Broadband, WiMax, Hotspots, Callshop, Calling Cards,
Internet, IP-PBX etc. have made the calculation of ROI, a perfect paradigm for
billing managers in Telecos around the globe.

DETERMINING THE REVENUE STREAM OF THE
POSTPAID BILLING BUSINESS

While appraising the investment value
of a billing system, we must first figure out precisely how much business we
anticipate to get from postpaid billing customers. Although the actual
computation will be a bit more involved than this, let's presume that a postpaid
billing system will have a useful life of 10 years.

• Step-1. Calculate the total revenue
stream for the next 10 years (Expected ARPU Average Revenue per User multiplied
by the Number of Customers).

• Step-2. Calculate the total
expenses (anticipated CAPEX and OPEX) for the same 10 year period.

• Step-3. Deduct the expenses from
the revenue to get the total net-revenue-before-billing-system-investment (NRBBSI).

NRBBSI = Total Revenues (10 yrs) —
Total Expenses (10 yrs)

To determine the ROI, simply deduct the
cost of the billing system CBS from the NRBBSI. The result will be the
net-profit after- billing-system-investment (NPABSI).

NPABSI = NRBBSI - CBS

If the NPABSI is good enough, then the
investment is a good idea.

CALCULATING THE ROI FOR EXPANSION AND
UPGRADING

The task for justifying the expense of
a billing systems upgrade or expansion is more challenging than calculating a
comparatively straightforward value of ROI while rationalizing getting a new
billing system. This is a fact that most companies already have billing systems
in place and needs an upgrade or enhancement of some sort.

IMPORTANT QUERIES REGARDING BILLING
SYSTEMS ENHANCEMENTS

Given that a billing system is already
in place, there are several queries that the manager should ask before deeming
an investment in an expansion project.

1) As
a result of billing errors or imprecision caused by the current billing system,
what percentage of revenue is being lost?

2)
What is the actual cost of running the billing system, and can cutbacks in
expense be achieved with an upgraded system?

3)
What are the future risks involved, as a result of the current billing system
capacity?

4)
What is the useful life of current system?

5) As
the teleco grows, will the current billing system be able to adapt new lines of
business or how much scalable and flexible the billing system is?

6)
What is the weakness to regulatory, investor or press scrutiny due to shortages
in the billing system?

7)
What is the anticipated future revenue flow of postpaid activity?

8)
What is the performance of related functionalities (NetOps, Mediation,
Interconnect, Collections, Provisioning etc.) and how well does the billing
system line up with another system's qualifications?

The financial disadvantages (hard costs
and opportunity costs) and advantages (cost reductions and future business
expandability) that upgrades to the billing system should generate, can easily
be perceived by managers just by reviewing the current revenues lost to
inappropriate billing, cost cuts that an enhanced billing system environment
could create, the risk coupled with the current systems capacity, and the most
likely future demand for postpaid billing commotion.

SUNK COSTS VS. EXPECTED LIFT FROM
INVESTMENT

Most of the telecos face another
problem as they already have billing systems in place. The preliminary
expenditure of the billing system is a "sunk cost" because the amount
is used up and cannot be recovered so there is no point in considering it. Now
when the case is to decide whether or not to upgrade the system, however, we
require a different calculation, called the 'lift.' Lift calculations try to
figure out what the incremental rise in revenue (or decrease in expense) would
be for each rupee invested in a billing systems upgrade. By carefully assessing
the answers to the eight major questions for billing systems upgrade as well as
finding out the economic value that each enhancement can deliver to the teleco,
we can evaluate those benefits against the costs and compute the lift they will
deliver. If the resulting lift is good enough, the expansion project is supposed
to be feasible.

TENTATIVE ENHANCEMENTS AS COMPARED TO
STREAMLINED ENHANCEMENTS

At present most of the telecos still
depend upon intuitions, feelings, and replicating other telecos despite of
performing a formal rationalization analysis. Still most managers would like to
see more scientific techniques used in major systems investment decisions,

The analysis which has been given here
straightforward and could very well help those managers unwind in regard to the
billing system investments they are planning to make.

Due to the increased vision and
concerns of senior executives of telecos regarding this issue, the need of a
comprehensive set of tools to determine the right amount of investment in
billing systems have risen tremendously, keeping in view the telecom industry
continues to grow in complexity, and as ARPU and revenues continue to decline.

Specifically talking about Pakistan's
telecom industry, the positive side of picture shows that during July-April
2006-07, telecom sector attracted US$ 1.4 billion which is expected to cross one
and half billion dollar mark at the end of year in addition to this, the total
tele-density in the country has reached 40.2 (as of end April 2007) registering
year on year (YoY) growth of 53 percent. All these positive signs shows the
potential of investments in pipeline of which billing systems are an integral
part.

But on the other side of picture one
must keep in mind that our telecom industry is still operating under the shadows
of strict regulatory framework of government and regulatory bodies. There are
few telecos who can afford opportunity costs and expenses related to the billing
systems upgrades and enhancements.